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Inside Dentistry
Nov/Dec 2010
Volume 6, Issue 10

Follow the Money: Smart Financial Planning in the New Economy

Allison M. DiMatteo, BA, MPS

YReal change is coming. The Tax and Reconciliation Acts of 2001 and 2003 will expire at the end of this year. The capital gains tax for lower-income individuals that has been 0%, and for the rest of Americans in a higher income bracket that has been around 15%, will be raised to 15% and 20%, respectively. The two-fold impact of these tax increases includes a constricted market, one in which a gradual behavior change will occur. Assets likely will be sold in order to realize the lower capital gains rate of 15%.

Yes, the worlds of personal and professional finances are changing. Some say it’s exciting.

“Doctors can’t expect things to go back to the way they were because, whether it’s oral healthcare or not, things aren’t going to go back,” asserts Keith D. Drayer, vice president of Henry Schein Financial Services. “The doctors who can maximize their sales in this new economy will do fine, although it will take some adjustments.”

Others are more cautious, noting that the American Dental Association has found that the majority of dentists cannot afford to retire at age 60 without taking a substantial cut in their standard of living. This is a telling statement considering dentists’ income compared to the median household income. Dentists make much more, says Robert J. Creamer, managing partner of Creamer & Associates, PC, and co-founder of the Academy of Dental CPAs.

“Why can’t they afford to retire? I believe that the majority of all dentists do not set goals and have a plan for reaching those goals,” Creamer explains. “They get caught up and involved in the day-to-day care of patients because they’re caregivers. But they also need to step back and place a priority on looking after themselves and their families, and to do that, they need to have goals, a plan, and to work the plan.”

This month, Inside Dentistry examines personal and professional finances, from estate planning and what changes can be anticipated with the sunset of the Bush-era laws, to preserving wealth in light of changes to the capital gains tax. We also take a closer look at issues affecting financing on the professional front, which could impact dentists just starting out in practice or looking to purchase, expand, or transition their practices. With sound advice and guidance from several accounting, tax law, and practice management experts, this month’s feature provides solid information dentists should bear in mind as they wrap up 2010 and head into 2011.

Getting Personal

Tax Planning

The bottom line is that all indications are that taxes are going up, including the capital gains tax, and dentists will be affected because they buy capital equipment and sell practices, notes Roger Levin, DDS, chairman and CEO of Levin Group, Inc. Their investment portfolios could also be affected by capital gains rates that will be higher than they have been in the last few years.

“This will affect the ability of dentists to accumulate wealth,” Levin says.

Understanding the Current Capital Gains Climate

Essentially, January 1, 2011 may see the end of historically low long-term capital gain rates, explains William J. Sifer, CPA, managing partner of deGrouchy, Sifer and Company. How much these rates will increase depends on an individual’s ordinary income tax bracket. Several Congressional proposals have been made that include alternative rates, with some affecting only high-bracket taxpayers. However, at this point they remain just that—proposals, he says.

According to Creamer, the capital gains tax right now is at 15%. Dentists are among the targeted group that Congress and the president have selected to help pay for government spending, particularly the new healthcare laws, through higher taxes, he elaborates.

“The targeted group basically are those earning $250,000 dollars and more, with dentists falling into that group,” Creamer says. “Unless Congress takes an active step to change the capital gains tax, it will by law increase to 20% next year for individuals in this group.”

However, it is limited to 18% for assets held over 5 years, he says.

“Keep in touch with your tax and financial advisors regarding year-end legislation. Currently, you may find it beneficial to sell appreciated securities or assets you have held for long term in 2010 to take advantage of this year’s low capital gain rates,” Sifer comments. “If you hold a substantial position in one stock that has appreciated over time, selling a portion of the shares and purchasing other investments with the proceeds can help you diversify your portfolio while taking advantage of capital gain rates that may not be there in future years.”

Planning for Purchases

Creamer says that when it comes to purchases, dentists need to plan. They have treatment plans for their patients, but what they also need is a treatment plan for their practice. They need to decide what their goals are; what type of practice they want; decide about their future and retirement; and develop a plan.

“We call it a treatment plan for their practice. Dentists outline what additional equipment or new technology they’ll need to add to get their office up-to-date,” Creamer says.

Levin cautions that dentists need to understand return on investment, adding that it’s very dangerous for a dentist to buy everything at once. Dentists run into financial problems because they may have overbought too fast. It’s not that they bought too much, but that they bought it too quickly, he explains.

“Planning purchases is critical. All too often, we make impulse purchases because we go to a tradeshow, see something we like, and we buy it,” Levin observes. “It might be better bought 6 or 12 months later.”

That said, Levin adds that it is harder to save money and accumulate wealth than in the past. Taxes are going up. Investments are growing much more slowly. There are more frequent recessions now than in the past, and our nation is just coming out of a deep recession. Home values are down. All factors combined, it will be harder for dentists to accumulate wealth, and practices are growing more slowly in the early stages.

Robert Graham, CFM, president of RG Capital, asserts that for purchasing power, cash is king. If dentists have a significant cash basis, they have choices with which to make smart financial decisions. An exercise in the basic financial premise of needs versus wants can help them evaluate whether liquidating or eliminating much of their cash holdings for an upcoming purchase will enable them to maintain and sustain that ongoing cost, as well as their safety net.

“When planning for significant business or personal acquisitions, be certain not to overextend yourself. Just because you qualify for a mortgage, it doesn’t mean you can afford it,” Sifer emphasizes. “When purchasing business equipment, always consider the cost of leasing versus buying. Be advised that there is no set rule about buying versus leasing.”

It comes down to the best economic deal at the time dentists are in the market for the acquisition, Sifer says. Also, with the current economic conditions, dentists may find a perfectly good piece of used equipment on the market at a fraction of the cost of new equipment, he adds.

Protecting Your Capital

There are two things that Levin is sure of. First, there are going to be fewer loopholes in the tax structure available. Second, state taxes are going to go up. That said, the key to wealth accumulation and tax planning is to start early, plan early, and save early; and the sooner dentists start their planning and saving, the better off they’re going to be.

“To protect themselves, I believe dentists need to hire certified fee-only financial planners who will develop a financial plan and very objectively demonstrate to them where they are, what they need to save, and what the best retirement funding mechanisms are,” Levin comments. “Planning is necessary, and since it is going to be harder to accumulate wealth, it is more important than ever before to have expert advisors.”

Estate Planning

From an estate-planning standpoint, there is a struggle taking place between Democrats and the Republicans over the Bush tax bill passed almost 10 years ago, which will sunset on December 31, 2010, explains Albert R. Riviezzo, attorney at law at Fox Rothschild, LLP. Because these cuts are going to expire, if nothing happens (ie, no extensions or new provisions are enacted), then the estate tax reverts back to what the law was in 2000, with only a $1 million exemption at death.

“This is creating a tremendous amount of confusion for the general public, but also among professionals who assist dentists in their estate-planning process,” observes Riviezzo. “In 2009, the exemption was $3.5 million, so we’re taking a huge step backwards.”

For example, Riviezzo says that if a dentist did his estate planning properly, and both he and his spouse died in 2009, combined, they could exempt the first $7 million of their estate from any federal estate tax. Now, with the sunset of the law, a couple will only be able to exempt the first $2 million dollars, or $1 million each, with proper estate planning.

“I guess the critical thing is to recognize many dentists actually are already outside the unified exemption amount,” Graham cautions. “Therefore, if they don’t do the proper planning, then a significant part of their estate may be lost to estate tax. It’s a very real consideration given the current values of most dental practices, plus their homes and other assets, both tangible and intangible.”

What’s more, according to Gerald M. Hatfield, attorney at law and partner at Fox Rothschild, LLP, it’s possible that dentists could have wills that were written before 2010 that had formulas in them geared toward the estate tax laws that existed historically, with changing exemptions and rates through 2009. Those wills may not work now, he says.

“You may have someone who has a will that was done in prior years geared toward reducing estate taxes, maximizing exemptions, and using marital deductions—all of the things that estate planners typically do when they’re planning for clients who have sufficient wealth. Those may not work if that person dies in 2010,” Hatfield cautions. “Therefore, the first piece of advice that any estate planner should give to clients is that their existing wills should be reviewed to ensure they don’t have a catastrophe in their estate planning because it was done prior to 2010.”

What to Expect with the New Law

As a result of tax legislation (EGTRRA), the estate tax applicable exclusion—the value that an estate must exceed before taxes are incurred—gradually increased until 2009, at which time it reached $3.5 million per individual, Sifer explains. Currently, there is no estate tax for 2010. However, the ERGTRRA provisions are scheduled to sunset (or expire) at the end of 2010, and the tax is scheduled to return in 2011 with a $1 million applicable exclusion and a 55% top estate tax rate. Many knowledgeable observers believe that a compromise is still possible, resulting in a different applicable exclusion and tax rate going forward, he says.

“We need to expect change. Right now, the Senate is still fighting over how to tax and how to value the estates of those dying in 2010. For 2011, rather than the old rule of a $1 million exemption, it would seem likely that we’ll see at least a $3.5 million exemption, with a tax rate of possibly 45%, and that might be reduced over time down to 35%,” suggests Joanne Humphrey, CPA, of Creamer & Associates, PC. “What we find is Republicans want that limit as high as $5 million, and that seems to be some of the battle.”

A big, positive aspect to the law changes would be reverting back to the old rule that allows taxpayers that inherit assets to “step up” the basis of the assets to the fair market value determined at the date of death, Humphrey says. Without this change, taxpayers had to go back and find the deceased owner’s original basis. This meant taxpayers had to search through many old records and files to determine the original purchase price of assets, she explains.

Proactive Steps to Maximize Your Estate

“If you have not looked at your wills and any trusts that might be related to the wills in the last 5 years, you really need to get in touch with your estate planner,” notes Riviezzo, noting that Bush-era wills were built with some design flexibility to allow postmortem estate planning in the event that changes were proposed to the estate laws. “For example, provisions in wills gave the surviving spouse the ability to disclaim some or all of the inheritance based on whatever the law happened to be in the year in which the death occurred.”

Hatfield’s first piece of advice is that dentists clearly should review their existing wills to make certain that, if they die in 2010, there is not an estate-planning disaster going on based on how those wills were written. His next piece of advice in terms of estate planning is to plan flexibly, because where the tax law is going, what’s going to come from it, and where it’s going to go are yet unknown.

“When someone is doing estate planning, they need to take into account that the law could revert back to what it was in 2000, or it could be something different with different gyrations,” Hatfield says. “So, planning should be done in a flexible way so that the plan will work whichever way the law goes. Sometimes it even means drafting in the alternative.”

Not surprisingly, it is therefore imperative that dentists meet with their attorney and financial advisor to perform an estate check-up and develop an estate plan, says Sifer. This includes an up-to-date will, with the possible use of trusts, and revisiting all asset holdings and how they are titled. In addition, all estate plans should allow for growth, as well as any anticipated major event that may affect net assets in the future, he adds.

“An estate plan is an ongoing venture that needs to be revisited and adjusted as the years go by,” Sifer notes.

If you haven’t considered or even started the planning process, now is the time to start. In order to maximize your estate, you need to protect your assets and get organized, says Graham. To help with the latter endeavor, there are estate-planning questionnaires online to help dentists take inventory of all of their assets and organize their estate. Then, seek out an estate-planning professional, such as an estate-planning attorney, to help organize the estate in a way that will help to offset, defer, and manage the estate tax laws so that there is the best possible outcome upon transition, he adds.

“It’s very important for dental professionals to seek out dental-specific estate-planning advisors that have many dental clients because they will understand the dentist’s growth dynamics and opportunities around dental practices when they construct these documents,” suggests Graham. “This will help protect the dentist’s lifestyle and both the living benefit and a death benefit as it relates to estate planning.”

And, according to Humphrey, anticipating liabilities and figuring growth potential is an important part of the asset inventory process. Many times real estate or other assets have significantly increased in value, causing unanticipated estate taxes, she says.

“Another method to maximizing their estate taxes is to review the titling of all assets and make sure they have the correct beneficiary designations. Dentists should specifically check their retirement accounts and life insurance policies,” Humphrey points out. “Dentists also can take advantage of the $13,000 annual gift exclusion. There also are advanced planning techniques available, like a Family Limited Liability Company (LLC) or a charitable trust. Both of these techniques can provide great tax savings.”

In fact, Levin adds that there are different types of trusts, and the right trust for the dentist’s family will preserve a great deal of wealth because the trust protects against taxes. However, experts are needed to guide them through the process, he reiterates.

“Finally, quite honestly, dentists need to build their practices earlier and faster than in the past. They can’t simply open their doors and wait for things to get better,” Levin urges. “I’m meeting too many dentists who are now in their fourth, fifth, and sixth year of the practice being flat or slow, and they’re going to be working many extra years as a result.”

Common Estate-Planning Mistakes

Sifer notes that among the common estate-planning mistakes dentists make are not securing umbrella insurance on their homeowners policy for asset protection; not incorporating their businesses to protect personal assets; not dividing assets among husband and wife to allow for the maximum exclusion; and not taking advantage of the allowable gifting programs to reduce their estate. Additionally, he and other interviewees outlined several of the following common mistakes to avoid.

1. Not starting early enough. Levin says many dentists mistakenly think they don’t have enough money to have an estate plan. However, they should develop one as early as possible, understanding that it can always be amended.

“The biggest mistake is planning one day too late,” Humphrey agrees. “What we find is dentists don’t have a will or don’t have a trust. Oftentimes, even when they have set up a trust, they have not funded it.”

2. Not updating the plan regularly. A plan for this year is probably going to have to be changed based on tax changes for next year, Levin explains.

3. Not implementing the estate plan. Probably the biggest common mistake Hatfield sees is that the estate attorney has drafted the most beautifully drawn document in the world, that is designed to maximize exemptions, minimize tax, and use marital deductions, and then no one implements the plan.

“That’s where I think many people fall short,” Hatfield says. “In order for many of these estate plans to work, especially from a tax-planning perspective and even from a non-tax perspective, the assets have to be aligned properly.”

4. Not surrounding themselves with the right experts. Many dentists use experts, but not necessarily estate-planning experts, Levin observes. Dentistry is a very esoteric field, and dentists do need to have the right people.

5. Not trusting the experts. Riviezzo has found that people may not trust their estate-planning advisor enough to share all of the information about the estate and the assets. If the dentist owns a practice, they may tend to inaccurately either overestimate or underestimate the value of the practice, and either scenario can cause certain estate planning design flaws to arise.

“If you’ve told your advisor that your practice is worth $2 million and then you add that to the other assets that you have, then the planner is going to develop a certain design,” Riviezzo explains. “If it turns out that the practice is worth significantly less than that, or significantly more, then the design will ultimately be flawed.”

6. Not having a plan that’s clear enough. There are many lawsuits after someone is deceased to argue against what the real intent was of the estate plan because it wasn’t clear enough, Levin says.

7. Not naming a beneficiary (or beneficiaries) to a qualified retirement plan or individual retirement account. Hatfield often sees clients who don’t rearrange their assets properly, or who don’t name or change the beneficiary designations for their life insurance, 401k plans, IRAs, etc. “They develop this wonderful estate plan, and then they don’t change their beneficiary designations in a manner that’s consistent with the plan or that flows in the same way that they want their other assets to flow,” he adds.

8. Not holding life insurance inside an irrevocable life insurance trust. Humphrey says that while individuals may own life insurance, they may own it in the wrong bucket. For example, rather than having the life insurance owned as a second-to-die policy that is not taxed in their estate, they have it taxed to their estate, which defeats some of the purpose, she says.

9. Ignoring the need/not planning altogether. Many times individuals won’t revisit their wills in 20 years, during which time they’ve experienced many life changes, and the wills are effectively ineffective because they’ve had children, or the children are now adults, or now they have grandchildren, Riviezzo points out. The will may not be designed to reflect what is, in fact, their current life situation.

“People die with no estate plan in place or an inadequate estate plan, one that goes to probate,” Graham cautions. “They lose personally everything they have, and the beneficiaries are left with nothing. That’s significant.”

“There needs to be an appropriate amount of time and attention to detail devoted to it,” Riviezzo says. “It doesn’t have to be done every year, but it should be in the back of your mind that every 5, 6, or 7 years you should pull that will out, look at it, and see if any life events have occurred that might require you to modify your approach.”

10. Lack of organization. Additionally, dentists may not be organized enough to have a professional put together a well-defined, well-crafted estate plan, Graham observes.

11. Not anticipating the cost of long-term illness. Humphrey notes that the cost of a long-term illness can really wipe out an estate, so long-term care insurance can be a great estate-preservation technique.

12. Not having enough liquid assets to pay any estate tax. This can force a family to sell real estate or other family assets to pay the estate tax, Humphrey explains. Also, quite often the largest asset of the dentist might be their IRA. Without after-tax savings, the IRA will have to be cashed in to pay the estate tax.

“In any estate plan, there are tax implications both at the federal level and, for many states, at the state level,” Riviezzo adds. “The practical side to estate planning is ensuring that if you and your spouse were to die while your children are still young, you need to be aware of the practical aspects of appointing a guardian; having the monies held in trust for the benefit of the children until they reach certain ages that you can designate in the plan (ie, the will itself).”

Many times people let the tax tail wag the dog, but they can’t ignore the practical aspects of the estate planning process, either, Riviezzo says.

The Professional Perspective

The number-one professional financial challenge is buying or opening a practice, which is also more expensive than ever before because dentistry has fantastic technologies today that dentists need to have, but they do come with a cost, says Levin. The key financial issue is evaluating how long it will take for dentists to have an income; evaluate cash flow so they can regularly pay the debt and their bills; and evaluate a growth pattern.

“Dentists need to run better businesses than in the past. In the past, you could run a practice sort of ad hoc. It wasn’t run as a business,” Levin observes. “Many practices are challenged today because they don’t have the business systems in place.”

Key Issues When You’re JustGetting Started

“The key make-or-break thing for a dentist is really maintaining good, quality credit and payment histories with their personal lines of credit,” asserts Gavin Shea, director of partner services for Matsco, a company that provides loans and financing to highly qualified professionals.

According to Chris Hovde, program manager for Clarion Financial, financial institutions typically look at three elements. Number one is a credit score, which is probably one of the most important considerations, he says, adding that it’s akin to going on a blind date; there’s only one chance to make one positive first impression.

The second consideration is licensure. Clarion Financial and other institutions like to see doctors that have been practicing for at least 2 years, because it shows their ability to produce and actually do dentistry. To verify this, lenders examine a dentist’s income levels for the last 2 years, collect tax returns, and also may collect production reports, if necessary, from their current location where they’re an associate, Hovde says.

Also taken into consideration is whether or not dentists will maintain their associate position when they transition to their new practice. Ideally, lenders like to see dentists stay in their current associate position and then, when they open their new practice, have it open 1 or 2 days a week in order to slowly transition and build up their patient base, Hovde elaborates.

“As they fill up the new practice, they’ll slowly transition out of their associate position,” Hovde continues. “This enables them to have better cash flow during the transition process.”

Liquidity also is a factor.

According to Joseph Jordan, an attorney-at-law working with Dr. Charles Blair Associates, the amount of a dentist’s liquidity doesn’t have to be substantial. Rather, he says that third-party lenders look to see that a dentist has some money in a savings account, isn’t living off credit cards, and isn’t living to the last dollar that they’re paid.

“On the flipside, what about buying a car or house? What about student loan debt? The banks know that dentists are going to have debts for these normal purchases,” Jordan says. “What they don’t like are the bad habits of overspending and not saving.”

And, depending on the circumstances, spousal income also may come into play. For example, if a female dentist is on maternity leave, she may not have practiced much over the last 2 years. When she decides to start a new practice, lenders might not find the production that they’re looking for because she’s been home raising a family, Hovde explains. However, her husband may be an attorney earning $300,000 a year. This comes into play because when she starts her new practice, the lender won’t rely on her to be the breadwinner; they’ll have the income from the husband so she can transition into her practice, Hovde adds.

Traditionally, most dentists move from being an associate to practice owner, as opposed to going directly from newly licensed doctor to becoming an owner, Drayer observes. Some dentists have been through multiple associateships before practice ownership due to the fact that, in hindsight, they could have seen the practice could not financially support two doctors, didn’t have enough new patient flow, or there were differing philosophies with the doctor, he notes.

“Dental schools and associateships are often not preparing doctors to treat a practice like a business,” Drayer says. “A doctor can overcome the financial challenges of healthcare and benefit from a network of healthcare financing veterans, accountants, or lawyers specializing in healthcare, and a distributor partner that can be consultative, provide fee analysis, or perform a practice analysis.”

Shea says the decisions dentists make before they start in the practice can have a very important impact on their ability to qualify for a loan. When they are in dental school, out of school, or working as an associate, it’s important for any credit that they’re extended that they maintain on-time payments, not assign the responsibility of managing their credit to others, and ensure that their credit score is in the best shape possible, he continues.

“If they don’t manage those things properly, it could take several years for their credit score to improve,” Shea cautions. “That really could postpone their plans for a significant amount of time.”

Although many dental start-up projects have been changed with the economy, Drayer finds that a flexible dentist who shifts plans can still get funded. A flexible plan example would have a doctor equipping some operatories and plumbing others, rather than equipping all operatories immediately. For practice acquisitions, he says lenders look at existing cash flow to determine how long a doctor would need to repay the loan comfortably.

“If a practice can repay the loan in 7 to 8 years’ cash flow, there’s a good chance the doctor will get the loan,” Drayer says. “If the doctor needs 10 to 12 years’ cash flow to repay the loan, it might be an opportunity to review the purchase price.”

Graham recommends that dentists have a legitimate pro forma or budget forecasting what their real expenses need to be. He has found that many underestimate what it will cost to open a practice. In fact, he’s found that they budget 50% of what they should in order to start a practice, only to go into exorbitant debt trying to cover all of their expenses for overhead, personnel, staff dynamics, all the equipment dynamics, building maintenance, etc.

“It’s also very important to understand the type of debt they’re getting into when purchasing something,” Graham says, noting that some financial institutions will aggressively offer dentists loans that are incredibly compromising, have payment penalties, balloons, and/or very onerous stipulations. “Dentists need to understand the terms of any debt they go into. Debt can be very scary, so they have to take a broad-ranged perspective of what they need to do as a business owner and practice manager to ensure that they’re efficient, low cost, and achieve the best possible outcome.”

However, among the necessary expenditures dentists should have when they’re starting out in practice is insurance protection—including term and disability insurance, says Charles Blair, DDS, publisher of Insurance Solutions Newsletter. Term insurance is extremely affordable, and bankers will require term insurance for any kind of debt. However, disability is the biggest exposure and a real threat, Blair believes.

“If a young doctor is skiing or in an accident and breaks a leg, it’s going to hurt their cash flow for a few months, but they’ll be back,” Blair says. “Permanent disability is really the elephant in the room.”

Smart Moves When Purchasing, Expanding, or Transitioning Your Practice

The first thing Levin says dentists need to do when purchasing, expanding, or transitioning their practice is analyze return on investment. Most business people will have a business plan; they’re going to buy a business, look at the business, and understand the return on investment. Secondly, they need to develop budgets, he says. Each year, the practice should have a budget so they know what the expenses are, what the doctor’s compensation is, and what the profit is. Then, they need to stick to the budget.

“If they can look at their budget to determine if they can afford something, that can make a significant difference, and outside experts can help them develop and stay within a budget,” Levin points out. “In terms of transitions, the earlier they start the transition process, the better and smoother it’s going to go.”

Levin recommends planning for a transition 5 years in advance by getting all the business systems in place and upgrading the office so dentists know how many patients are active versus inactive. Additionally, they should conduct a practice valuation to determine what the practice is worth 5 years ahead, as well as search for the right buyer without feeling pressure, he says. They also should consult an expert to guide them through the deal when they negotiate the final points, and have contracts from a dental-knowledgeable attorney so that nothing can come back at them once they have left practice, Levin says.

One nuance that an existing practice owner has that a start-up practitioner doesn’t is maintaining a healthy and consistent cash flow within their practice, Shea comments. Working with an advisor can help dentists manage the cash flow, he adds.

“When a doctor comes back to finance a remodel and an expansion, the lender is going to look at whether they’ve been able to operate their practice sufficiently, pay their personal bills, and earn a healthy income,” Shea explains. “We’re going to layer in these new debt payments into this practice and see if they’ll be able to pay back that loan with the cash flow within their practice. If the formula says yes, then they should be able to borrow that money. If it says no, they may have to determine where their expenses lie, and usually a lender will want to see a 2-year cash flow history.”

Additionally, while it’s great to think ahead and be ready to take advantage of opportunities that allow dentists to reach their professional goals, Drayer says dentists should have at least a “fair” credit score to obtain the best financing. There are multiple free websites that provide an individual their credit score (annually for free, or more frequently than that, for a fee). He notes that every practitioner should have a credit check-up and not wait until they apply for a new loan to discover a problem.

“For credit-challenged individuals, if they can raise their credit score even by just 20 points, they may become eligible for competitive equipment loans or insurance precuts, as well as potentially lower their personal interest rate and payments on everything from credit cards to mortgages,” Drayer observes. “This access to capital could make a substantial difference in their practice to allow them to acquire equipment, expand services, and increase their profit margins.”

The median credit score was in the 720 range before the recent economic turmoil, and has now dropped to 680, Drayer says. A credit score drop of just 40 points effectively doubles the risk for creditors. According to the Federal Reserve Bulletin, many credit reports may contain some type of error, making it all the more important for practitioners to see their reports, he adds.

According to Hovde, it’s pretty standard throughout the industry that if a doctor has been in a location, they own the practice, and they present with a good credit score, they can be approved for $200,000 to $300,000, possibly without any additional information, assuming that their license is in good standing. It’s an easy process for dentists to add equipment to a current location, he says.

However, when dentists are looking to finance more of a project type of deal, defined as the doctor not only getting equipment, but also needing financing for leasehold improvements, because only half of their finance amount is being collateralized with the equipment, financial institutions typically will review their entire financial package. At that point, lenders would collect tax returns, both personal and business, and conduct a cash-flow analysis to make sure their current income and production level is sufficient to support not only their current practice, but also the new practice or expansion they’re looking to undertake, Hovde explains.

“Sometimes we hear dentists question why we look at their personal credit report for a business loan,” Hovde admits. “Typically, the response is that the doctor is the practice. Even though they might set up a professional corporation or incorporate their practice, lenders still examine the dentist’s personal credit, as well as get their personal guarantee for all financing.”

Graham notes that the dynamics for purchasing a practice and expanding a practice are different. Prior to entering a new location, dentists should test market need, demand, and all the demographics. If the dentist is a specialist, they should perform a competitive analysis to see how many other specialists are in the area that they would be competing with, and they also should look in the area for referring doctors to make sure they have enough referring doctors to sustain the practice, he comments. As far as the population, they should examine the patient-to-doctor ratios to make sure there are enough patients to sustain the services they’re going to bring.

“If they’re purchasing another practice or they’re adding another location, those are some very real considerations,” Graham notes. “At that point, many of our dentist clients already have enough experience in running the practice, but they need to make sure they have the patient and referring doctor base to sustain their practice.”

As far as expanding a practice, whether adding some chairs or expanding into different locations, it still goes back to capacity, Graham points out. For instance, if an orthodontist who is working 3 days a week feels out of space those 3 days a week and considers expanding into a location next door, Graham would ask what would happen if they didn’t add space but instead either had an associate come in for the other 2 days a week, or added a day a week to their practice.

“It’s really understanding what their visions and goals are, what their lifestyle requirements are, and what they need, and then backing into very sound management,” Graham explains. “When dentists expand, whether it’s to a new location or by adding to their current location, they’re adding overhead. They need to make sure they have the production and potential production to support, and four to five times the expense, this added overhead.”

Financing Capital Equipment

Levin says there are two ways to buy capital equipment. Dentists can pay for it outright or they can pay it out monthly, as in the case of a lease or a payment plan. The only question is, how long will it take to pay back the investment? That’s really what it comes down to, he notes.

“If they’re looking at it monthly, which is a very good way to buy capital equipment, then you look at the return on investment per month,” Levin explains. “If the first month is a $300 payment, can they produce more than $300 using the equipment? They basically want to beat the monthly amount.”

The most important thing for dentists to know is that money for capital equipment financing is still available from healthcare-specific lenders for equipment financing to practice start-ups, projects, or practice acquisitions, asserts Drayer. On June 21, 2010, The Wall Street Journal published an article in the small business section entitled, “The Credit Crunch That Won’t Go Away.” Fortunately, dentists have fared better in the economy than general businesses, he says.

“It makes great business sense for dentists to take advantage of 2010 tax benefits while delaying payments until 2011,” Drayer suggests. Henry Schein Financial Services is currently offering no payments until 2011. “This allows a dentist who invests in dental technology to master the technology before any payment is due, thus benefitting from the equipment before having to pay for it.”

Graham has found consistently within the industry that dentists are considered a low-risk credit pool when financing and borrowing. Many lenders would be happy to lend for equipment, expansions, or other things dentists want to do as they relate to financing.

“The biggest thing is to really understand the terms,” Graham cautions. “Dentists forget that some of these have prepayment penalties. Some have large origination fees up front or on the back end. They have balloon payments where, after so many years, they’ll call the entire note, which could be so significant that it could literally put somebody out of practice.”

Graham strongly encourages anyone making a big purchase or considering borrowing money to get an objective second opinion from someone that won’t benefit whether the loan is done or not, such as a financial advisor or wealth manager. This professional can analyze the loan on behalf of the dentist and determine whether it’s a good deal or not and help them find the hotspots, he says.

Overall, however, Drayer suggests that this is an ideal time to invest in equipment to meet the demands of today’s healthcare industry. In March 2010, President Obama signed the Hiring Incentives to Restore Employment (HIRE) Act into law. The HIRE Act contains benefits for practitioners, and small-business owners/practice owners have limited time to benefit from these tax incentives for acquiring technology and/or equipment, he explains. These benefits will be reduced substantially after December 31, 2010. In addition to the HIRE Act benefits, interest rates are low. Because of these beneficial conditions, installing equipment and technology in 2010 can create a cash flow win-win for healthcare practitioners, Drayer says.

Additionally, for the 2010 tax year, many small businesses may deduct up to $250,000 if the equipment or software they purchase is placed in service this calendar year. This valuable break—the Section 179 depreciation deduction privilege—is an exception to the general rule that businesses must depreciate equipment and software costs over several years, Drayer points out. Section 179 is an annual “use-it-or-lose-it” accelerated deduction benefit that optimally lowers taxable income. The bonus depreciation is allowable for regular and alternative minimum tax (AMT) purposes for the tax year in which the property is placed in service, he adds.

“This deduction may be available whether you are a sole proprietorship, a partnership, or a corporation. If you plan to acquire equipment or technology in the near future, utilizing a finance agreement or capital lease will qualify you for this benefit, whereas true leases or fair market value agreements will not,” Drayer elaborates. “If you use a finance agreement to acquire your equipment and you have deferred payments, you may file your tax returns and achieve the benefits before you have made any payments.”

On Monday, September 27, 2010, President Obama signed The Small Business Jobs Act into law. As a result, the annual Section 179 deduction is increased from $250,000 to $500,000, with a 50% bonus depreciation.

Finally, dentists should become informed about and discuss Section 199 with their tax advisors, Drayer says. This section allows them to deduct a portion of their milling activity to further reduce taxable income. Dentists with an in-office CAD/CAM system (eg, CEREC®, Sirona Dental Systems; E4D Dentist System, D4D Technologies) now qualify as a manufacturing facility. Such systems are utilized in “qualified production activities” (QPA) that can qualify for a manufacturing tax reduction of 9% in 2010 and every year thereafter,” he adds.


After 25 years of working with dentists to help them maximize their practices, Levin observes it’s harder now to accumulate wealth than in the past. This means dentists need to start everything earlier, whether it’s practice building or estate planning.

“We don’t have the luxury of the first 10 years to get it together, because those who do are going to add 10 to 12 more years of practice than the last generation,” Levin cautions.

Therefore, the best thing for dentists to do is choose the right partners to help them, and there are a number of people equipped to provide the right level of support, Shea suggests. Dentists should seek out those people, ask them questions to understand what they’re getting into, and ensure they’re working with somebody that’s really going to partner with and support them with the right advice, Shea says.

“We’re about to enter into somewhat of a very uncertain period in this country when it comes to tax laws, both on the income tax side and the estate tax side. With the growing deficit, there will be efforts made to increase taxes, and if nothing is done, the Bush Era tax cuts will expire,” Riviezzo warns. “Many dentists will find their tax burdens increased on the income tax side, so what they really need to do is work even more closely with their tax advisors, whether accountants, lawyers, or in-house staff, to be able to respond in 2011 and going forward.”

However, despite the uncertainty, it’s still much better professionally to be involved in oral healthcare than in so many other possible industries because the graphics are still positive in dentistry, Drayer believes. The population is growing, getting older, and needs to stay with their primary oral healthcare provider. Edentulism is down, and baby boomers still want to look good, feel good, and are still spending money on elective cosmetic procedures.

“At the end of the day, dentists have a great deal to be optimistic about,” Drayer asserts. “Combine that with the tools that can help them run a better practice, and they’re in great shape.”

Editor’s Note

Please be advised that the information in this article provided by Keith D. Drayer, as well as all of our interviewees, may not apply to everyone and is not, and should not be considered, tax advice. Check with your own advisors about what strategies are best for you.

The Inside Look from...

Issue after issue, the feature presentations in Inside Dentistry deliver coverage of the relevant and thought-provoking topics specifically affecting day-to-day practice within the dental profession. The publishers and staff could not bring the underlying concerns and trends surrounding these timing issues to the forefront without the insights shared by our knowledgeable and well-respected interviewees. For their collective generosity of time and perspectives, we extend our sincere gratitude.

Charles Blair, DDS

Dr. Charles Blair and Associates

Publisher, Insurance Solutions Newsletter

Robert J. Creamer

Managing Partner

Creamer & Associates, P.C.

Academy of Dental CPAs

Keith D. Drayer

Vice President

Henry Schein

Financial Services

Robert Graham, CFM


RG Capital

Gerald M. Hatfield, ESQ


Fox Rothschild, LLP

Chris Hovde

Program Manager

Clarion Financial

Joanne Humphrey, CPA/PFS


Creamer & Associates, P.C.

Academy of Dental CPAs

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